05 October 2014

Runaway horses

 There are about 48,000 wild horses on our grassy Western plains, which is nearly twice as many as the range can support, according federal wildlife managers. Obviously, the range is currently supporting all those horses, so talk about how many horses the range can support is an oblique way of talking about competing calls on that range. And the most obvious competitors--or at least the most vocal--are ranchers, who don't like all those horses eating grass and drinking water that could be going to their cattle.
   What definitely seems unsustainable is our current wild-horse policy. Since 1971 it's been illegal to capture or kill wild horses. So to keep numbers down, the Bureau of Land Management has been rounding up wild horses and storing them in feedlots and fenced pastures. The Bureau is now responsible for some 50,000 warehoused wild horses, which it can't euthanize or slaughter. The horses can be adopted, but adoptions have never kept up with removals, just as there have never been enough removals to keep the wild population to a "sustainable" number. The Bureau currently spends $50 million a year on its horse hotels, which leaves too little money for additional roundups.
   I learned all this from a New York Times article, the most interesting feature of which was the startling omission of two words: invasive species. Horses are not native to the New World. The wild horses of the American West are the feral descendants of domesticated horses brought over by the mainly Spanish early settlers. Like many other immigrants to our shores, the horses found America a great place to settle down and raise a family.
   People pretend to object to invasive species, but that only applies to species they don't like. Everyone has a fondness for horses, so attempts to wipe out these four-legged invaders are not in prospect. Indeed, we tend to pass over the uncomfortable fact that they are invaders; the Times article noted that unchecked horse populations could decimate grass and water on public lands, potentially leading to "starvation among horse herds and other native species" (my italics). You're in, guys!

02 October 2014

How many ignition switch deaths? Postscript

   On Monday I posted a note on a New York Times story (from the preceding Friday) about the GM ignition switch disaster, the gist of which was that the particular accident the Times focused on in that story didn't seem to be caused by the defective switch.
   The following day the Times did a follow-up reporting that the ignition-switch death toll, as determined by Kenneth R. Feinberg, who administers the compensation fund GM set up, had risen to 23. Once more the Times illustrated the story by pointing to a particular victim, an infant rendered a paraplegic in an accident in which his great-grandmother and 13-year old aunt died. But through some evil chance, the Times managed to again alight on an accident that also seems unrelated to the switch problem.
   The particular accident is not mentioned in the massive Valukas report commissioned by GM, but was described in a Times' July 16 story: "Less than a mile from the Matthews family's home, another car swerved into their lane and crashed head-on into the Cobalt." The air bags did not deploy.
   As I briefly described the situation in Monday's post, and at greater length in posts referred to there, GM's theory that connects the ignition switch to the failure of the airbags is that there is an initial bump, as when a car goes over a curb or hits a bush or small tree, followed by a more serious crash into another object, such as a tree. The initial bump causes the defective switch to jump to the ACC position, which (after a delay of 0.15 seconds) turns off the airbag sensor. Almost all the accidents described in the Valukas report conform to that scenario, but that is clearly not what happened in the case described in Tuesday's Times. There was no initial bump that flipped the ignition switch, just a head-on crash.
   The Times has now unfortunately spotlighted the only two reported fatal accidents that don't seem connected to the ignition switch. (The Valukas report describes one other non-fatal non-conforming case.) It's not clear why the airbags didn't deploy in these cases, and the ignition switch could ultimately turn out to be the culprit. But the GM theory not only accounts for most of the accidents, it's the only theory we have; no one else has conducted engineering tests to determine if there are other reasons for the airbags not to deploy.  Perhaps a certain number of airbags fail to deploy for unknown reasons across all car makes and models. Or perhaps there is a deeper problem with the GM airbags that is as yet unappreciated. In any case, the Times coverage casts doubt on the extent of their reporters' understanding of what is going on.

29 September 2014

How many ignition switch deaths?

   A sad tale of missed opportunities on the front page of Friday's New York Times: A 27-year old law student, Lara Gass, died in the fiery crash of her Saturn Ion just three days after she received a recall notice from GM for a faulty ignition switch. The flaw in the switch, undetected by GM for over a decade, allowed it to turn to the ACC position if jostled slightly, disabling the air bags. The message: If only GM had acted sooner, her life and many others might have been spared! All the story lacks is a convincing connection between her death and the faulty switch.
   The story of how GM engineers failed to detect the faulty switch is a fascinating one, about which I've written before. But while there are still some unanswered questions, it's hard to see how the switch could have been involved in Ms. Gass's crash. Some facts are clear: Two tractor-trailers stopped on the highway to avoid a wreck, and Ms. Gass's car plowed into the back of one of them. A photograph shows the car, its driver's compartment totally demolished and blackened by fire.
   Beyond that, facts are sketchy. A police officer was puzzled as to why Ms. Gass was not able to stop in time. The car's data recorder was destroyed in the fire, as was any physical evidence as to whether the airbags deployed. Two eyewitnesses who pulled the young woman out of the car moments before the vehicle erupted in flames said they saw no airbags. One suspects, however, that they were preoccupied with getting the young woman out of the car, and in any case their testimony comes from the lawyers for Ms. Gass's parents.
   Even if the airbags didn't deploy, it's hard to see how the ignition switch could have caused the failure. The article does not mention whether there was any physical evidence that the key was in the ACC position. GM insists that the key will not turn to the ACC position if there are no other objects on the key chain, but while Ms. Gass's parents had warned her to remove other objects from the key chain, the fire destroyed the chain.
   When the key on any GM car turns to the ACC position, power to the sensor for the airbags is lost after about 0.15 seconds. This is designed to prevent the airbag from going off if the car is hit while parked. But 0.15 seconds should be enough time to trigger the airbags in a head-on crash. Almost all the cases that came to GM's attention involved a crash preceded by a bump, as when a car jumps a curb or hits a small bush (the bump) and then hits a more substantial object, such as a tree (the crash). The theory is that the bump jolts the ignition switch to the ACC position, cutting off power to the airbag sensor and preventing the airbags from deploying in the ensuing crash. That clearly is not what happened in the Gass crash. (Actually two of the airbag failures that GM investigated--one fatal--didn't follow the bump-then-crash scenario, but airbags must occasionally fail for other reasons.)
   GM has set up an uncapped fund, initially for $400 million, administered by Kenneth R. Feinberg, to compensate victims of the faulty switch. Mr. Feinberg has now made an offer to Ms. Gass's parents to settle any claims they may have against GM. The size of the offer is confidential, but the low offer for any fatality is reportedly $1 million.
   I doubt that there will be many claims that were actually caused by the defective switch, or that GM expects to see any of its $400 million again, so giving large settlements to anyone who was killed or injured in a GM car where the airbags may not have deployed wouldn't be the worst use of the money, whether or not the defective switch was the cause. Two things remain disturbing, however. First, how could the Times, which has run numerous prominently placed stories on the ignition switch problem, have so bungled things by misrepresenting the problem? The situation is bad enough--the faulty switch almost certainly killed some people--but there's no excuse for inciting what resembles a lynch mob. The Times selected 10 of the 211 comments on the story as "NYT picks." The first sentence of the first pick reads "GM has put more lives at risk on American soil than ISIS could dream of"; the second states that "All of this simply proves that if a corporation has enough money and political clout it could avoid personal liability of those individuals that allowed this tragedy to occur. ... The company should be put out of business." The Times' role in promoting this kind of hysteria is not an honorable one.
   Second, given the standards, or lack thereof, for settling claims, how will we ever know just how many casualties were caused by the faulty switch? The Times referred to "the rising death toll from accidents linked by the company to the ignition-switch defect," but that rising toll (23 as I write this) may be an artifact of Mr. Feinberg's relaxed standards. Again, I have no trouble with giving away the money, but I think we should be clear that some of the awards probably have nothing to do with the switch problem.

17 September 2014

Anger over Ray Rice, and the Islamic State

The general line on the Ray Rice matter is that the original punishment--a two-game suspension--wasn't nearly enough ("spineless" said Juliet Macur), and that the NFL covered up how much it knew about that conduct. When the inside-the-elevator video eventually surfaced, the league suspended Rice indefinitely and the Baltimore Ravens released him.
      Keith Olbermann was characteristically apoplectic about the two-game suspension, and Michael Powell talked about "the Circus Maximus that is the National Football League," which "long ago banished shame from its executive suites."
      I beg to differ. I don't follow football closely, have no opinions about the NFL or its executives, and haven't been privy to any of the league's internal discussions about Rice. But viewing things from outside, I don't think the original two-day suspension was too little, and I find the final punishment disturbing.
      The problem the NFL faced, which few of those who have raged on about Rice's and the NFL's behavior seem willing to countenance, is how to suitably punish the perpetrator, Ray Rice, without punishing the victim, Janay Palmer (now Mrs. Rice).
      Before he was fired Ray Rice stood to earn about $25 million over the life of his contract. (Rice's compensation would have depended on his performance, so it's impossible to state an exact number, but $25 million is close enough.) Mrs. Rice would have gained a material benefit from that haul. As it is, she's now married to a man who, while currently well-off, may be unemployable.
      On the other hand, the two-game suspension seems about right. Rice's base salary for 2014 would have been $4 million, so missing two games--one-eighth of the regular season--would have cost him at least half a million dollars. That's more than a slap on the wrist, and enough of a warning of what could happen if there was another incident.
      Punishing the guilty often has bad consequences for the innocent. If Ray Rice had decked a total stranger, and gone to jail for it, his wife, his teammates, and many others would have suffered. That couldn't have been helped. What's different in the actual case is that Rice's punishment, however richly deserved, will directly harm the ostensible object of all this concern, Mrs. Rice, who deserves better.
      I have nothing to say about the Rices' relationship other than the obvious: It's complicated. So were the issues facing the NFL and the Ravens as to what to do about it. But Mrs. Rice has been nearly forgotten in the orgy of declamations about larger issues. Whether the NFL was originally trying to do the right thing or simply covering up, they have now given way to the hue and cry.
      Yes, violence against women, including domestic violence, is an issue that deserves to be taken more seriously; no doubt traditional sanctions have been too lenient. But in the midst of this ideological frenzy, it might have been more compassionate to step back and consider the actual plight of the real woman at the end of Ray Rice's fist.
      OK, I get it. We see the tape of Ray Rice knocking the future Mrs. Rice unconscious, and we have a burst of anger. In our rage, we wish for Rice to be severely punished--Half-measures will not do! But when we eventually calm down, we may realize that our actions might not have been the wisest or best.
      Which brings me to the Islamic State. We see the tapes of the beheadings (actually, I've avoided them; hearing about it is bad enough) and we react: Kill those guys! something within us shouts. Bomb them back to the Stone Age! So President Obama, propelled by public anger and perhaps personal conviction authorizes an air campaign against IS.
      But when we calm down we may want to step back and ask ourselves whether this is the wisest course. And the place to start is by asking why IS decided to publicize the beheadings. If IS really wants to set up a government in the Levant, then inciting a military campaign by the US and others looks counter-productive. Perhaps they weren't thinking too clearly--terrorists can succumb to irrational anger too. But it's also possible that IS saw the beheadings as a recruiting tool, partially because they could attract young men willing to join in sanctified mayhem, but mainly because they could paint their struggle as a war with America and the other infidels rather than what it truly is, a war against other Muslims. If that was their goal, then they've been playing us like a violin.
      We've been through all this before. The Twin Towers fall, and our fear and rage lead to various self-mutilations: TSA, USA PATRIOT, Iraq. We should have learned more.
      Get a grip, folks

09 September 2014

How Many Species Do We Need?

   A recent op-ed piece in The New York Times captured in a few sentences most of my discomfort with environmentalism. It described the aims of the Endangered Species Act as
   "[F]irst, to mitigate harms that humans had perpetrated against certain species, such as severely reducing their geographic range; and second, to make it possible for species to return to landscapes where they had been extirpated. The idea was that healthy ecosystems depend on the presence of native species."
   Talk about "healthy landscapes" is obviously metaphorical, but what is the metaphor getting at? Are the Sahara, the Antarctic, or the ocean depths unhealthy because few creatures can survive there? The answer seems to be that a "healthy landscape" just is a landscape that contains all and only its "native species."
   But what species are "native" to a landscape? Clearly, not all the species that are well-established there; I doubt that nativists would consider the Burmese python, a recent immigrant to the Everglades, or the Asian carp, a newcomer to the Mississippi, as "native" even though they are thriving. And some species no longer inhabit their historical landscapes, such as the grey wolf in most of the United States. Presumably, species are native to a landscape if (and only if) they were established there at some earlier point in time, but when would that have been?
   I suspect the answer is tucked away in that reference to mitigating the "harms that humans had perpetrated against certain species, such as severely reducing their geographic range." The idea seems to be that the native species in a landscape are those that were firmly established there before we humans came and mucked things up. But to "make it possible for species to return to landscapes where they had been extirpated," we'd probably have to pack up many of the humans now living there and send them back to their native landscapes. Which is where, exactly?
   Plainly, the government is not about to send millions of Americans back to wherever they or their ancestors came from. The best the Endangered Species Act can achieve is some reasonable accommodation between the thrust of populous contemporary human societies and our desire to maintain some pre-Columbian landscapes (to arbitrarily take a particular point in time) with their then-existing flora and fauna.
   Native Americans have recently been introducing native species, such as the swift fox and black-footed ferret, into never-plowed grasslands on Indian reservations. As the president of the Fort Belknap tribe said, "Part of our connection with the land is to put animals back, and as Indian people, we can use Indian country." That a group would want to create some replica of its historical experience is understandable, but why should non-Indians care about importing wildlife to its historical range and, by extension, exporting humans from that range?
   Most of us like to preserve ancient things; we have museums for man-made artifacts. But once we have enough museums to satisfy most of us, is there any reason to preserve more? I enjoy auto museums, but am not in favor of preserving every car ever made or returning any substantial number of them to the nation's roads. Nor do I think anyone would seriously suggest restoring the nation's highway system to its early-20th century form.
   Why should natural environments be different? To be desolated by the loss of any creature or natural habitat seems no more sensible than mourning the passing of my 2005 Honda Accord. If we woke one morning to discover that there was no longer a single 2005 Accord extant, I doubt that we would be much discomfited. Why should it be different when it's a natural species rather than an auto species that goes extinct? I'm not saying there is no difference, only that I would like to know what it is.
   Three reasons for preferring ferrets to Accords have occurred to me, all somewhat suspect.
   First, once a species disappears, we can't recreate it in the way we could build a working replica of a 2005 Accord. Some day that may not be true, and we can have a Jurassic Park of formerly extinct species, but for the moment extinction is an irreversible decision. Like a tattoo.
   The second reason is related to the first: It's difficult to foresee all the consequences of doing without a species. But isn't it just as difficult to foresee all the consequences of retaining a species? And, in truth, it shouldn't be that difficult to foresee the consequences of species extinction. Before a species goes extinct, its numbers decline, and the loss of most of a species must have larger consequences than the loss of the last few specimens. If we haven't noticed any adverse effects of losing most black-footed ferrets, then we're unlikely to notice the effects of losing the remaining few. (We might fail to notice that we've lost most of a species before the process becomes irreversible, but that's a separate problem of environmental monitoring.)
   The thought of the black-footed ferret going extinct sends many people into a funk. But extinctions happen all the time. There are supposedly about 8.7 million species on earth. It's also said that of all the species that have ever existed, 99.9% are now extinct. Putting those two numbers together means that over the course of the earth's history some 8.7 billion species have gone extinct--about one extinction every five months for the 3.6 billion years since life emerged on this Earth. Talk about a funk! (I have limited confidence in these numbers, but that doesn't change the central conclusion: There have been an enormous number of extinctions.)
   Of course, humans had nothing to do with any but an infinitesimal portion of this carnage. There were at least five mass extinctions before there were any humans, and lots of non-mass extinctions in between. Which brings us to the third and most powerful reason--most powerful because it is generally unexamined: Many people view the pre-modern world as morally and aesthetically superior to the grimy world of industrial society. In this mindset, the pre-industrial world is natural, the current state of affairs unnatural.
   Justin E. H. Smith, a professor of history and philosophy of science at the University of Paris Diderot, does not subscribe to these views, but he does offer a more plausible explanation of why we value ferrets above Hondas. Unlike many environmentalist screeds, Smith's argument doesn't rely on purely metaphorical arguments. "Nature," says Smith, "is indifferent." The earth isn't an organism that can be healthy or sick, that has a suitable body temperature, or an ideal set of charismatic megafauna. "The earth does not resent its humans, nor does it have any interest in preserving its polar bears or its rain forests."
   According to Smith, environmentalists conceive of a stable order of fixed kinds, where any change is "unnatural." Such a "mythological outlook" is the opposite of Darwinism, which denies that any particular arrangement of biodiversity is good in itself, or that any species has an absolute reason to exist. According to Smith,
   "Human beings are no less natural than bacteria. ... It is because we are fully in nature in this way, and not above it or apart from it, that the mass extinctions we cause cannot be unnatural--in fact, the very notion of the 'unnatural' is generally nothing more than a shrouded moral judgment."
   Judging by the posted comments to Smith's piece, most readers see him as accepting extinctions. But Smith is merely attacking environmental styles of argument; he has his own reasons for opposing extinctions:
   "The point here is not to ... call for an approach to mass extinction that simply says, que sera, sera. Rather, it is to suggest that conservationism might do well to acknowledge the endurance and the strength of the mythopoetical conception of nature, the one that sees our fellow creatures not only as more or less well adapted, but also as good, truly good."
   Smith argues that we feel a "fellowship" with animals that leads to a moral commitment. "[M]oral commitments emerge out of the way creatures, human and nonhuman, enter into meaningful exchange with one another."
   Smith has a good bit to say about the influence of photos in turning animals into "fellow beings." He's mainly referring to the photographic record of recently extinct species, but the same could be said of the influence of wildlife documentaries about existing species, such as PBS's Nature series.
   In basing his opposition to extinctions on feelings of fellowship, Smith is following a philosophical tradition that roots morality in our instinctive feelings of pleasure or pain when confronting the pleasures or pains of others, feelings sometimes characterized as "sympathy" or "empathy." The most prominent exponent of this view, David Hume, realized that these feeling could extend to animals: "[T]here is no human, and indeed no sensible, creature, whose happiness or misery does not, in some measure, affect us when brought near to us, and represented in lively colours."
   Recent natural extinctions seem to be a mirror of human progress. The relentless march of modernity is homogenizing human cultures, reducing diversity world-wide. One symptom is the decline in the number of human languages. Linguists expect that at least 3,000 of the nearly 7,000 known languages will disappear over the next century, "a vastly greater proportion of the world's languages than its biological species."
   We can weep at this loss of cultural and linguistic diversity, but we should realize that these changes are by-and-large welcomed by the people whose culture is being homogenized, including us. When you bought your HD TV, I doubt that you shed a tear for the cathode-ray tube model that it displaced, nor thought it regrettable that CRTs might someday flicker their last. Most people want TVs, i-Phones, indoor toilets, central heating, and modern medicine. Judging by migration patterns, they want to live more like Europeans and Americans. At the same time, they want to keep many traditional customs and practices, however incompatible with modern life. No one said people were consistent.
   It's much the same for natural species. Most of us love trees, flowers, and furry animals. We love to stroll outside on early summer evenings to see the fireflies and hear the crickets. We like to watch breathtaking HD views of tropical jungles on Nature, safe in our air-conditioned living rooms from lions and leeches, vipers and tsetse flies. A few of us actually go off for outings to thinly-peopled climes and feel ennobled, but most of us decline to do it regularly.
   As with most other things in life, our attitude toward extinctions is an attempt to work out some modus vivendi among our various incompatible desires: We want to preserve species and habitats, but we also want to have increasingly comfortable lives. As Smith says,
   "We talk about 'saving the earth,' but what we really want is to save ourselves. ... [W]e must be clear about the motive for our conservation efforts. ... [M]ore honesty about the fact that we wish to save polar bears because we love them, and not because the earth loves them, could help to reorient conservationist arguments in a direction that skeptics would find more compelling."
   But we love lots of things besides polar bears. With so many romantic urges to balance, we should realize that we often have to kill the things we love.

PS If you found all of this depressing, maybe this will make you feel better: Of the 8.7 million species on Earth today, it's believed that fully 86% of those on land and 91% of those in the oceans still await description--that is, are unknown. If all of these unknown species were to be cataloged during the next century, that would be equivalent to discovering over 200 new species every day for 100 years. Welcome to life's abundance.

29 August 2014

The Role of the Credit Rating Agencies

   In the wake of the crisis of 2007-08 and the ensuing Great Recession, there was a torrent of criticism of the credit rating agencies, such as Standard & Poor’s and Moody’s, which had given their highest ratings—AAA—to mortgage-backed securities (MBS) and collateralized debt obligations (CDOs) that defaulted in massive numbers. One popular explanation for the faulty ratings has been that the agencies gave inflated rating to securities because they were paid by the issuers; if an agency declined to give a AAA rating, it wouldn’t be used and wouldn’t be paid. This explanation has been questioned by economists. I personally think (along with some economists) a better explanation is that the rating agencies were working from the same faulty assumption as everyone else: that a substantial decline in home prices was highly unlikely. Put slightly differently, the rating agencies (and almost everyone else) did not believe that there was a housing bubble.

   I’m not equipped to sort out those issues. Rather, I want to recount my personal experience with the role of the rating agencies in the MBS world immediately before the tsunami hit. I didn’t negotiate with any rating agencies and all my experience related to prime and alt-A residential mortgage securitizations (RMBS), so my observations may not hold for CDOs and subprime MBS.

   There are only four rating agencies: Standard & Poor’s (S&P), Moody’s, Fitch, and Duff & Phelps. S&P and Moody’s are the big fish, Fitch a smaller fish, Duff a minnow. An RMBS issuance needs ratings from two agencies, and no one would proceed with a RMBS rated only by Fitch and Duff. Which means that every securitization had to have a rating from either S&P or Moody’s. What’s more, investors occasionally insist on ratings from both the big guys, so that issuances rated by both S&P and Moody's were a bit more saleable. Under these circumstances, an issuer’s power to negotiate for higher ratings was limited.

   A RMBS issuance consists of a number of classes with different ratings from AAA to junk. As homeowners default on their mortgages, the lowest-rated class takes the losses until it is wiped out, then the next lowest-rated class, and so on up the ladder. In rating RMBS, the rating agencies principal decision is the level of protection that will justify rating a class AAA (or AA, or A, and so forth). That comes down to a decision as to how much padding there should be under each class. Should 5% of the issuance be rated below AAA, or should it be 5.5%?

   In my experience, issuers shopped for ratings, but that shopping was limited to how much of the issuance would be rated AAA. The decision was important to issuers because AAA classes fetched higher prices than lower-rated classes. But as a percentage of the offering, the differences between rating agencies was small, on the order of tenths of a percent. So in a $500 million offering, one rating agency might be satisfied with a $24 million cushion of below-AAA classes while another might want $26 million. A financial crisis is not made of such differences.

   As I said, my experience was with prime and alt-A RMBS. The ratings of CDOs, which were more central to the crisis, may have had a different dynamic.


25 August 2014

The Earned Income Credit

In late June I posted a piece about the minimum wage. I was generally opposed to it, partially because of the possible effects on employment—I thought some people would lose their jobs—but also because I saw it as a reflexive, feels-good approach to an issue that requires serious thought. At the end of the piece I noted that some policy wonks had proposed an expansion of the earned-income credit (EIC) as an alternative to the minimum wage, and I said I would write something about the EIC one of these days. That day is here.
But first I want to talk about a personal interest in the minimum wage. My younger son refused to go to college, despite being probably the brightest one in the family. Instead, he spent a year at a technical school learning to be an auto mechanic. (He’d previously done a lot of mechanic’s work fixing beat-up vehicles at a Colorado wolf sanctuary where he spent a few years.) Course completed, he went back to Colorado and took a job with an auto dealership as a “lube tech”—the guy who changes your oil, rotates your tires, and does the safety check. All for $9 an hour, raised to $10 after his third month (though he does get to buy into the company health plan at a below-market price).
It’s not enough to live on, even for a single young man. The carrot is that eventually—though it could take several years—he would move up to a real mechanic's job, where the pay is better though still not great. In the meantime, he’s working Real Hard. It’s not like bagging groceries. For one thing, to do the work well you have to know quite a few things you don’t just learn on the job. And it’s hard physical labor, not to mention that you’re on your feet almost all day. On top of all that, it costs a bit of money just to be a mechanic; it’s the mechanic, not the employer, that supplies most of the tools, and lube techs may have to pay for damage done to cars, such as scratched paint, during oil or tire changes. Both the tools and the damage can cost thousands. Finally, doing it badly, especially the safety checks, could get someone killed.
So, despite my principled objections to the minimum wage I might be in favor of Colorado enacting a $15/hour minimum as Seattle recently did. (Not that there’s much chance of that; only this past January 1, Colorado raised its minimum hourly wage to—drum roll—$8.) On the other hand, a raise from $10 to $15 might get my son unemployed; people might want fewer oil changes or tire rotations, or pay their neighbor’s kid to do it. I don’t think there would be a precipitous fall in lube tech employment, but it’s quite a risk when you consider that the job’s main attraction isn’t the pay but the opportunity for advancement. Think of lube techs (and perhaps many other low-wage workers) as extremely well-paid interns.
But why does a hard job that requires some technical expertise pay so little? The economics texts tell me it’s because there are lots of people who are able and willing to do the work for that pay. Supply and demand, if you will. Apparently there aren’t that many attractive jobs for intelligent high-school graduates. Still, it’s not clear why they should earn no more than sales clerks, who requires minimal training. Puzzling.
And now for the EIC. An EIC has the government pay low-wage workers a supplement for each hour they work. Right now the EIC is paid through tax code refunds, and participation and benefits are limited. Current proposals are to open it up to all low-wage workers and to make it more generous.
The attraction of the EIC is that there is no danger that it will increase unemployment. Indeed, it seems likely that it will decrease unemployment for the workers it covers. That’s because part of the EIC goes to employers rather than employees.
To see why employment might increase, suppose that the government starts to pay an EIC of $2 an hour to bakers, who previously earned $8 an hour. At $8 an hour, bakeries were just able to fill all their openings. (If they couldn’t, bakers’ wages would have risen.) But with a $2 EIC, the employer can now fill all the bakers’ positions while only paying $6 an hour, with the EIC raising the bakers’ total compensation to $8. But an employer who now pays a wage lower than $8 is likely to want to hire more bakers, since he can now sell more bread at a lower price, and this will raise the wage above $6.
Suppose that as a result of the EIC, the bakery winds up paying an hourly wage of $7—$1 lower than it paid without the EIC—while the bakers enjoys total compensation of $9 an hour($7 wage plus $2 EIC) , which is $1 more than they received before the EIC. The EIC raises bakers’ compensation while lowering bakers’ wages, with the difference being made up by the EIC. Both bakers and bakeries are better off, and more bakers are employed.
We don’t know a priori how much of the EIC will go to the bakery (in the form of the lower wage it has to pay), and how much to the bakers (in the form of a higher post-subsidy wage rate). That depends on market responses to the introduction of the subsidy. But statistical studies by economists indicate that employment has in fact responded to increases in the EIC, suggesting that the EIC has allowed employers to pay a lower wage.
Like the policy wonks, I prefer an EIC to a minimum wage. But most of the popular writing on both proposals refuses to come to terms with a critical question: Why do some workers earn less than others? (It’s the same question I wondered about for my son the lube tech.) Folk wisdom, too often reflected in media accounts, holds that employers are mean-spirited. The economists’ answer is that workers get the value of their marginal product; if that product is less valuable than the workers’ pay, their employer will fire them, lower their pay, or go out of business; if the workers’ product is more valuable than their pay, other employers will bid them away. Obviously, nothing in real life works that smoothly, but it’s hard to deny that the relation between the value of work product and work compensation exerts a force that over time will bring wages into line with what people are willing to pay for the workers’ product.
The direct cost of the EIC supplement will be borne by taxpayers, and there will also be indirect costs in economic efficiency: Workers will move between jobs to reflect the altered compensation landscape. Still, these efficiency losses should be less than with a minimum wage, and the benefits to low-wage workers higher.
—Stan (with help from an actual economist)